Republican Sweep, Clinton’s Change of Heart May Aid the State

California’s economy continues its modest recovery. At 7.7%, the unemployment rate is down from over 9% a few months ago, but still well above the national average. Most other indicators of economic activity are up.

The forces and trends that shape the state’s economy are first and foremost the activities of the private sector--in California, the rest of the country and around the world. These forces are affected only somewhat by state and federal economic policies--or even by local government developments on the scale of Orange County’s bankruptcy. So, much of California’s future depends on its entrepreneurs and workers seizing opportunities to create new industries and expand existing ones, thereby creating more jobs.

However, state and federal policies do matter. And the direction of state and federal policies will reflect the electoral tsunami of 1994.

Not only did the Republicans obtain majorities in the House and Senate and a majority of the governorships, but not a single incumbent Republican lost a bid for reelection--no senator, representative or governor. The election first and foremost was a rejection of the overreaching of government on many fronts. Taxes are too high; the government spends too much, and inefficiently; the government regulates too much, generating so much red tape and bureaucracy that it stifles business starts and expansions, and on and on.

Previously in this column, I’ve focused on four of President Clinton’s policies and proposals that are, or would be, damaging to California’s economy. Fortunately, the new Congress is likely to reject some and end others. In fact, Clinton is starting to run back toward the political center as fast as he can.

First among the problems besetting the California economy: huge defense cuts--and the prospect of even larger cuts in the future. Over half of the jobs lost in the California recession are defense-related. The Republicans’ “Contract With America” calls for increases in defense spending. The Republicans may or may not be able to accomplish that, but at least they will stop the additional dramatic reduction Clinton has proposed. A couple of weeks ago, even the President called for a $25-billion increase in defense spending--although most of that is in the distant future.

Second, health care reform. The new Congress will consider incremental reform to improve portability of benefits and access to health care and to deal with pre-existing conditions. But the radical government takeover of health care and its financing envisioned by Clinton is dead.

Third, taxes. There will be no more tax increases. The House Republicans pledged several tax cuts, and the President last week revived his campaign pledge of a middle-class tax cut. Hopefully, the growth of entitlement spending will be slowed and ineffective programs eliminated, so that, combined with the economic growth from lower taxes, tax rates can be cut without worsening the budget deficit.

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Democrats call these proposals a return to Reaganomics, dismissing the latter as a deficit-deepening failure. The longest peacetime expansion in American history, 1982-1990, is more than sufficient to dismiss that charge. But government spending went up, not down, during that period. This time, there is more of a consensus for eliminating programs and reducing spending. Witness the defeats of House Speaker Tom Foley (D-Wash.) and would-have-been Democratic Senate Leader Jim Sasser of Tennessee, who ran in part on their power to bring home the bacon.

The fourth issue I wrote about before the election was illegal immigration. This subject is enormously emotive--as has been highlighted by the passage of Proposition 187, which, if enforced, would cut off some state services to illegal immigrants. Whatever one believes about the propriety of Prop. 187, controlling the borders is a federal--not state--responsibility. And if the federal government is not going to make a serious effort to reduce the massive inflow of illegal immigrants, it should either pay for the services it mandates the state provide or relieve the state of the mandate.

Expect the new Congress to propose giving the states more block grants and greater flexibility to attempt reforms in various programs, such as welfare. Gov. Pete Wilson has indicated a great desire to do so--and to end the red tape and stonewalling involved in getting waivers from federal requirements for these programs, as well as the endless appeals through the judicial system necessary to implement legislation. (More on state policy and the economy in my next column.)

All in all, the change in control of Congress, Wilson’s reelection by the largest plurality in 20 years and the apparent move toward the center by the President suggest that many of the federal policies that have contributed to California’s economic woes will be changed. Congress will prevent the imposition of new unfunded mandates on the states. There will be no more tax hikes. The defense slowdown will be arrested, perhaps even partially reversed. And if health care reform is passed, it will be far less intrusive economically.

All this potentially adds up to a big plus for California.